On April 5, 2023, the IRS wrapped up its Dirty Dozen 2023 list – earlier than the release of the Dirty Dozen 2022 list which was published on June 10, 2022. According to the IRS, the Dirty Dozen represents the worst of the worst tax scams. The Dirty Dozen is a list that is compiled annually by the IRS in order to alert taxpayers, tax professionals and financial institutions of tax scams that occur at any time during the year. This list has been published by the IRS for over 20 years. The point of the Dirty Dozen is to alert all that Illegal scams will lead to significant penalties, including interest and possible criminal prosecution. IRS Criminal Investigation works closely with the U.S. Department of Justice to prosecute the criminals that continue to originate these scams and shut them down.
When publishing the Dirty Dozen 2023, the IRS also takes the opportunity to reminder taxpayers, businesses, and tax professionals to watch out for these schemes throughout the year, not just during tax season as these scams can occur throughout the year as fraudsters look for ways to steal money, personal information, data and more. Moreover, taxpayers ought to know that they are legally responsible for what’s on their return and should rely on reputable tax professionals they know and trust. Finally, taxpayers should always remember that if something sounds too good to be true, it probably is.
Dirty Dozen 2023 summary:
- Employee Retention Credit claims: these are aggressive pitches from scammers who promote large refunds related to the Employee Retention Credit (ERC). The warning follows attempts by promoters to con ineligible people to claim credit. The IRS highlighted these schemes from promoters who have been blasting ads on radio and the internet touting refunds involving Employee Retention Credits. These promotions can be based on inaccurate information related to eligibility for and computation of the credit. Some of these advertisements exist solely to collect the taxpayer’s personally identifiable information in exchange for false promises. The scammers then use the information to conduct identity theft.
- Phishing and smishing: these are fake communications from those posing as legitimate organizations in the tax and financial community, including the IRS and the states. These messages arrive in the form of an unsolicited text (smishing) or email (phishing) to lure unsuspecting victims to provide valuable personal and financial information that can lead to identity theft. The IRS initiates most contacts through regular mail and will never initiate contact with taxpayers by email, text or social media regarding a bill or tax refund.
- Online account help from third-party scammers: these are swindlers that pose as a “helpful” third party and offer to help create a taxpayer’s IRS Online Account at IRS.gov. The online account provides taxpayers with valuable tax information. But third parties making these offers will try to steal a taxpayer’s personal information this way. Taxpayers can and should establish their own online account through IRS.gov.
- False Fuel Tax Credit claims: this credit is meant for off-highway business and farming use and, as such, is not available to most taxpayers. Unscrupulous tax return preparers and promoters are enticing taxpayers to inflate their refunds by erroneously claiming the credit. The IRS has seen an increase in the promotion of filing certain refundable credits using Form 4136, Credit for Federal Tax Paid on Fuels.
- Fake charities: whenever a crisis or natural disaster strikes, scammers set up fake organizations to take advantage of the public’s generosity. They seek money and personal information, which can be used to further exploit victims through identity theft. Taxpayers who give money or goods to a charity might be able to claim a deduction on their federal tax return if they itemize deductions, but charitable donations only count if they go to a qualified tax-exempt organization recognized by the IRS.
- Unscrupulous tax return preparers: taxpayers ought to watch for common warning signs, including charging a fee based on the size of the refund. A major red flag is when the tax preparer is unwilling to sign the dotted line. Avoid these “ghost” preparers, who will prepare a tax return but refuse to sign or include their IRS Preparer Tax Identification Number (PTIN) as required by law. Taxpayers should never sign a blank or incomplete return.
- Social media: Fraudulent form filing and bad advice via social media can circulate inaccurate or misleading tax information. Examples involve tax documents like Form W-2 or Form 8944. While Form 8944 is real, it is intended for a very limited, specialized group. Both schemes encourage people to submit false, inaccurate information in hopes of getting a refund.
- Spearphishing and cybersecurity for tax professionals: Phishing is a term given to emails or text messages designed to get users to provide personal information. Spearphishing is a tailored phishing attempt to a specific organization or business. The IRS is warning tax professionals about spearphishing because there is greater potential for harm if the tax preparer has a data breach. A successful spearphishing attack can ultimately steal client data and the tax preparer’s identity, allowing the thief to file fraudulent returns.
- Offer in Compromise mills: can aggressively promote Offers in Compromise in misleading ways to people who clearly don’t meet the qualifications, frequently costing taxpayers thousands of dollars. A taxpayer can check their eligibility for free using the IRS Offer in Compromise Pre-Qualifier tool.
- Two Schemes aimed at High-Income filers: a) the Charitable Remainder Annuity Trust (CRAT) is an irrevocable trust that lets individuals donate assets to charity and draw annual income for life or a specific period. These trusts are sometimes misused by promoters, advisors, and taxpayers to try to eliminate ordinary income and/or capital gain on the sale of the property and b) Monetized Installment Sales: in these transactions, promoters find taxpayers seeking to defer the recognition of gain upon the sale of appreciated property. They facilitate a purported monetized installment sale for the taxpayer in exchange for a fee.
- Two Bogus tax avoidance strategies that include: a) Micro-captive insurance arrangements that involve schemes that lack many of the attributes of legitimate insurance. These structures include implausible risks, failure to match genuine business needs and unnecessary duplication of the taxpayer’s commercial coverages and b) Syndicated Conservation easements: A conservation easement is a restriction on the use of real property. Taxpayers may claim a charitable contribution deduction for the fair market value of a conservation easement transferred to a charity if the transfer meets the requirements of Internal Revenue Code 170. In abusive arrangements, which generate high fees for promoters, participants attempt to game the tax system with grossly inflated tax deductions.
- Three Schemes with international elements. They are:
- Offshore accounts and digital assets: The IRS continues to scrutinize attempts to hide assets in offshore accounts and accounts holding digital assets, such as cryptocurrency (digital assets). The IRS continues to identify individuals who attempt to conceal income in offshore banks, brokerage accounts, digital asset accounts and nominee entities. Asset protection professionals and unscrupulous promoters continue to lure U.S. persons into placing their assets in offshore accounts and structures saying they are out of reach of the IRS. These assertions are not true. The IRS can identify and track anonymous transactions of foreign financial accounts as well as digital assets.
- Maltese individual retirement arrangements misusing treaty: These arrangements involve U.S. citizens or residents who attempt to avoid U.S. tax by contributing to foreign individual retirement arrangements in Malta (or potentially other host countries). The participants in these transactions typically lack any local connection to the host country. By improperly asserting the foreign arrangement as a “pension fund” for U.S. tax treaty purposes, the U.S. taxpayer misconstrues the relevant treaty provisions and improperly claims an exemption from U.S. income tax on gains and earnings in and distributions from the foreign individual retirement arrangement.
- Puerto Rican and foreign captive insurance: U.S. business owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign corporation in which the U.S. business owner has a financial interest. The U.S. business owner (or a related entity) claims a deduction for amounts paid as premiums for “insurance coverage” provided by a fronting carrier, which reinsures the “coverage” with the Puerto Rican or other foreign corporation. Despite being labeled as insurance, these arrangements lack the attributes of legitimate insurance.
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